What’s happening

and what it means to you

Sit tight

09/03/2010 – Fine Wine Investment –

Understandably enough we’ve had a lot of queries recently
about how resilient we might expect fine wine prices to be in the current
investment environment. We have watched with great interest as the gold price
has risen strongly over the last 8 months in response to what has seemed an
irreversible series of uncertainties, whether it be Brexit, geo-politics, trade
and tariff talks, and now, of course, coronavirus.

By extension clients have gone on to query the
outperformance of gold against fine wine in these circumstances. At times of
uncertainty, we are given to understand, investors seek comfort in physical
assets. Fine wine is a physical asset like gold, yet its prices have lagged
substantially over the last year. The Liv-ex 1000 is down 4% against a rise of
25% in 12 months for gold.

We would argue, however, that all things have not exactly
been equal over the last few months. The fine wine market has been hit by a
triple whammy which is quite unusual as we shall explain. Any global market
place has a variety of customers, by definition. In the case of fine wine the
majority of buyers come from Hong Kong and China, the US, and the UK.

We noticed some months ago that buying from the Far East had
softened significantly, as the unrest in Hong Kong started to neutralise the
former colony’s ability to act as an entrepot particularly to China. Over much
the same time the Brexit uncertainty in the UK saw activity reduce locally,
whilst the imposition of tariffs on French wines by the US administration did
for a lot of the buying from there.

When you consider these factors in aggregate it is remarkable that the fine wine
market has stood up as well as it has. If you throw in the perfectly reasonable
profit-taking in the Burgundy sector it gives some impression of the heavy
lifting the other sectors have had to do. And now we have coronavirus putting a
further dent in proceedings.

When a market place is young, as in the case with fine
wines, there will tend to be a fair number of inconsistencies, and Amphora
clients know that we spend a great deal of time examining the inefficiencies of
pricing that arise from this, with a view to taking advantage and enhancing
investment returns. It is always comforting to know though that there is a seam
of logic running through the market place as a whole, or else price
differentials would never be arbitraged away.

What we would have expected over the last year, in the face
of the above slings and arrows, would be outperformance of non-French wines,
and a broadening of interest in wines from Burgundy, and it is comforting to
see that this is exactly how the market is playing out. As of this moment it is
difficult to see any reason to change this approach unless you have a
particular view of how the coronavirus outbreak will evolve. Why?

A professional investor has no time for emotion, and spends
most of his/her time looking for ways to make money. To that extent what has
happened over the last couple of months will have given rise to this key
question: has the correction in equity prices given us a fantastic buying
opportunity? This is not the place to explore that question, it is merely
sufficient to know that it exists. Evidence of the practical effects of that
fact can be found in the rebounds we see in equity prices from time to time
during the current phase.

So how does this all affect the fine wine market? To our way
of thinking the market is very largely consistent as to how it prices its very
wide variety of wines. It exhibits the sort of logical response to external influences
such as those noted above (e.g. the outperformance of Italian wines). Hence its
relative resilience over the last year is either exhibitive of paralysis, or
underlying strength. To help determine which it may be instructive to ask these
questions: what would happen to prices if we were to remove any or all of the
three key obstacles? Can we look beyond coronavirus? These are the questions a
professional investor would be asking.

As to the latter, you pays your money and you takes your
choice. It is either “different this time”, or the effects will be as limited
as those pertinent to earlier epidemics like SARS and MERS. At this point
no-one has a clue. As to the former, although we cannot know if and when the US
tariffs on French wines will be removed, we believe that US interest in fine
wine is unabated, and has simply shifted elsewhere in the market. In so far as
this helps broaden the market it is a good thing.

The Asian buyers are a slightly different matter. Chinese
wealth and passion for fine wine have helped determine the fortunes of the fine
wine market for some years now. To a great extent Chinese buyers have required
Hong Kong intermediaries to help them access the world’s finest wines, so the
combination of the political unrest in Hong Kong and the questions posed of
Chinese economic growth by coronavirus have applied a considerably brake to
proceedings. Both questions are still in the air so we should expect no great
support from the market from Asia for the time being.

Whether we believe the Brexit uncertainty is resolved or not
is currently of marginal importance given the unknowns elsewhere. We are
reassured by the resilience of the market over the last year, and are confident
of rising prices once some of the current anxieties abate. Until then we would
just continue to sit tight.

We believe that investing in wine should be both enjoyable and profitable, but like any traded commodity there are risks and wine can go down in value as well as up. Amphora is an audited member of the Wine Investment Association, but neither Amphora nor the wine market in general is regulated by the Financial Conduct Authority.

Paintings produced with kind permission of the artist Michael Kidd. To see them in their full glory click here